UBS is predicting a \’major gold rally\’ this year

Will the U.S. economy make or break commodities?

That was the question posed by UBS in a note to investors on Monday, as gold and other precious and base metals enjoyed a snappy little recovery. April gold
was up nearly $20 an ounce. Gains were helped in part by a global equities rally that looked to be taking hold Monday. Read more on gold trading.

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So, the conclusion from UBS? As analyst Julien Garren explains in a note, the role the U.S. economy plays in influencing commodity prices is a delicate dance, but providing investors can be patient, it\’s a winner for gold. Part of the selloff for gold last week was blamed on Fed minutes that triggered worries the central bank would wrap up its big asset-buying program faster than expected. That means holding gold as an alternative to the U.S. dollar, seen as vulnerable to the Fed\’s stimulus policies, is less urgent.

Here\’s how Garren expects things to play out for gold:

\”A recovery that led to strong job gains and an unexpected rise in inflation would likely force the Fed to end QE, and that would be very bearish for commodities. However, given the Fed voters\’ highly dovish bias, we expect them to continue printing into 3Q13 when we in commodity strategy, in contrast to our economists, expect global growth to lose momentum. That sets up a major gold rally in Q3,\” says Garren.

Straight out U.S. demand for commodities is also a potential boost for prices, says Garren. The U.S. accounts for 10% of global aluminum and copper demand, but adding in finished goods imports, that total rises to 15%. Last year, he says UBS estimated the U.S. destocked 10% of a year\’s demand for those metals. Maury Harris, chief economist at UBS, is forecasting demand-led restocking in the first half of 2013, which means the U.S. could add around 1.5% to 2% to world demand for metals in the first half, much more than the 0.2% that consensus expects.

UBS\’s Garren tosses in some stock picks for good measure, such as buy-rated Rio Tinto
, Glencore
, Xstrata
, Ferrexpo uk
, Kazakhmys
and Freeport
. He also likes Franco-Nevada, though investors should be aware that gold \”sweetspot\” is coming mid-year.

An upbeat word or two from UBS looks well-placed on a Monday where it\’s all go for gold. So toss that in the ring with Citigroup\’s bearish call on gold last Friday. Citi went as far as to warn about \”hibernation\” from gold prices and slashed ratings on three miners.

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